Case Could Drain A Marketing Pool

February 19, 1991|By Bill Grady, Merrill Goozner and John O`Brien.

Removing impurities from tap water may be one of the latest eco-fads, but a lawsuit pending in federal court here alleges that the main business of a Memphis-based manufacturer of water-filtration products is siphoning money from its bottom-rung distributors.

Now, more than 100,000 water-purifier sales people, who contend they were bilked out of $5,000 and up apiece by National Safety Associates Inc., will get a chance to prove their charges. Their lawyers say they were victims of a giant ``Ponzi`` or pyramid scheme.

Last week, U.S. District Judge Brian Duff approved class-action status for the estimated 100,000 ``individuals, partnerships, corporations and other entities who invested in National Safety Associates Inc.`s `stairsteps of opportunity.```

Duff`s ruling results from a six-count complaint filed last year by two distributors against NSA. The complaint alleges that the firm wasn`t selling home water-purifier systems, as sales brochures indicated, but rather the opportunity to make money by getting other people to sell water-purifier systems. Initial investments in an NSA franchise ranged from $5,000 to as high as $25,000, according to the complaint.

``There are people with garages full of these water filters all over the country,`` said Ronald Schy, an attorney with Chicago`s Beigel & Sandler who filed the suit. ``There was no reasonable opportunity to make money from the sale of the product.``

According to the complaint, NSA had up to 500 sales pyramids, each headed by a ``national marketing manager`` who sold distributorships for a fee. Each newly recruited distributor would sell subdistributorships and so on down the line.

Because of the nature of the alleged scheme, Schy maintains that NSA wasn`t selling a product but a form of securities. A positive ruling on that allegation could have a far-reaching effect on other firms using multilevel marketing plans, he says.

``Lawyers across the country for firms like Amway bend over backwards to avoid being called a security,`` Schy said. ``If we prevail, other multilevel plans will have to be quite careful to avoid that.``

Donald Mackay of McBride Baker & Coles, which represents NSA, refused to comment on the pending litigation. ``It`s a narrow procedural point,`` he said about the class-action ruling. ``There`s nothing that indicates whether or not (Duff) believes this is a Ponzi scheme.``

In self-defense

A local criminal defense lawyer and former high-profile assistant public defender has a court date this week, but this time he`s the client.

William A. Swano, whose offices at 2532 S. California Ave. are down the street from the Criminal Court building, is scheduled to appear in court Thursday on possession of cocaine and marijuana charges resulting from his arrest last month by Chicago police. Police reports allege that Swano was arrested at a motel at 646 W. Diversey Pkwy. after a manager complained of constant traffic in and out of a room where police said they found him.

According to police reports, when officers attempted to enter the motel room, a voice inside was heard to say, ``I`m a lawyer. You need a search warrant.``

The charges, which Swano told us he`s confident will be dropped, may not be his only legal headache. There are reports federal authorities are interested in talking to him about disclosures that El Rukn street gang members tried to give a $25,000 bribe to a judge hearing murder charges against two gang members whom Swano represented. The two eventually were convicted.

Swano said he hasn`t been asked by anyone to do anything, adding, ``My name has not been mentioned (in the reports).``

Swano also once represented a reputed hit man whose other lawyers in the early 1980s included Robert Cooley. The hit man is now a federal informant, and Cooley is the attorney whose cooperation with federal prosecutors led to the indictments of Ald. Fred Roti (1st) and Pat Marcy Sr., secretary of the 1st Ward`s Democratic organization, on bribery and extortion charges.

- TRAVEL NOTES. He`s no longer Illinois governor, but apparently old habits are hard to break for Jim Thompson, now a honcho at Winston & Strawn.

February is the month AFL-CIO leaders gather for their annual meeting, and Thompson, always a favorite of organized labor, once again has made his annual trek to Bal Harbour, Fla. He attended the Illinois AFL-CIO`s luncheon Monday and plans Tuesday to attend the state`s reception he formerly hosted as governor.

Thompson, though, seems to have left big shoes to fill, because this year it will take two Illinois politicians-Cook County State`s Atty. Jack O`Malley and Gov. Jim Edgar-to host the reception at the Jockey Club. Other Illinois pols at the convention include two newly elected Democrats, Atty. Gen. Roland Burris and Comptroller Dawn Clark Netsch.

- U.S. Supreme Court Justice Harry Blackmun will be honored March 6 by the Decalogue Society of Lawyers at its annual merit award dinner.